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Avoiding Legal Pitfalls During RIFs and When Reducing Workers’ Hours

by John Vering

On Oct. 3, the U.S. Bureau of Labor Statistics’ reported that over the past 12 months, the number of unemployed has increased by 2.2 million and the unemployment rate has risen by 1.4 percentage points. Total nonfarm payroll employment decreased by 159,000 in September and thus far in 2008, payroll employment has fallen by 760,000.

If your company is considering reducing workers hours or pay or laying off employees, it’s important to avoid legal pitfalls that could land your business in court. Read on to see what steps you can take to minimize your risk of getting hit by a lawsuit if you have to undergo a reduction in force (RIF).

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Consider alternatives to a RIF
Implementing a RIF during a recession creates the greatest hardship on employees because it throws them out of work at a time when there is limited hiring by other employers. As a result, you’re wise to consider alternatives to a RIF, including a hiring freeze, a temporary shutdown of a facility or of certain job functions, reducing employee hours and/or overtime, reducing employee wages and benefits, retraining or reassigning employees, and voluntary early termination incentive programs.

Some of these options have pitfalls for the unwary. For example, if a company closes down operations for part of a week because business is slow, exempt employees would still have to be paid for the entire week. If it shuts down for two days out of the week, an employee on Family and Medical Leave Act (FMLA) leave who was absent that week would only use three days, not a full week, of FMLA leave.

If you’re pursuing a voluntary incentive program option, make sure the incentive is actually voluntary. Get help from experienced labor counsel in both drafting your program and making sure that releases comply with legal requirements, including the very detailed requirements of the Older Workers Benefit Protection Act (OWBPA), which we’ll address later in the article.

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Look before you leap into a RIF
When determining who will be let go in a RIF, note that objective criteria (e.g., dollar volume of sales by a salesperson) are more legally defensible than subjective criteria (e.g., gets along well with coworkers). It’s usually a good idea to have legal counsel assist in conducting an adverse impact analysis and any due diligence before making a final decision about who will be laid off. Doing so will eliminate the sudden realization that you’ve laid off a disproportionate number of minorities or persons in a protected age group. Your due-diligence analysis should ensure that anyone who is laid off doesn’t happen to have recently complained about discrimination or blown the whistle on alleged illegal activity at the company.

In 2008, U.S. Supreme Court resolved a dispute among the courts regarding whether the employer or the employee has the burden of proof in RIF cases when the criteria for selection are questioned by the employee. In those cases, the employee often claims that one or more criteria used in the RIF had an adverse impact on older employees. As expected, the employer usually contends that its decisions were based on reasonable factors other than age (ROFA). The Court confirmed that the burden of proof for those ROFA will rest on you, the employer.

Severance benefits
A determination needs to be made about whether to grant severance benefits to employees being laid off and, if so, how much. In recent years, employers have gradually reduced the number of weeks of severance granted in connection with RIFs to reduce costs. Some companies facing hard times pay no severance at all. When it is paid, it’s sometimes conditioned on the employee signing a release of claims. As mentioned earlier, any such release should be drafted to comply with the OWBPA.

If the severance plan contains an ongoing administrative scheme, it will likely fall under the Employee Retirement Income Security Act (ERISA). When that’s the case, the severance package must meet the requirements for an ERISA plan. However, if the employee is only receiving a one-time lump-sum payment of severance triggered by a single event, such as the need to reduce the number of employees, it’s unlikely that the package will qualify as an ERISA plan.

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WARN Act
The federal Worker Adjustment and Retraining Notification (WARN) Act and its regulations are quite complex. First, you must determine if you are a covered employer. If so, are you laying off enough workers that a WARN notice is required? In determining whether and when notice must be given, don’t forget your obligation to look at past and potential layoffs within both 30 and 90 days. For businesses with a single site, a layoff of 50 or more employees during a 30-day period triggers the requirement for WARN notices. If multiple sites are involved, the period extends to 90 days.

In other words, the WARN Act sometimes requires an aggregation of separate layoffs that on their own would be insufficient to require a WARN notice. Some federal courts have been extremely strict in construing the wording of any release of WARN Act claims. Therefore, be sure your employment counsel has reviewed any release you ask employees to sign. Also, remember that some states have their own WARN Act. Examples include California, Illinois, New Jersey, and Maine.

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Continuing obligations
Remind departing employees of continuing obligations they may have under a noncompete, nonsolicit, or nondisclosure agreement. You may also want to consider whether there might be a need to have the employee consult or give testimony in the future. If that’s the case, it may be worthwhile to pay at least some employees an additional sum to obtain their agreement to consult or give truthful testimony in the future.

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Releases
It’s critical that releases be clear and understandable and that they comply with both federal and state law. Remember, not all claims can be released without government agency approval. For example, there are special requirements with respect to the release of claims arising under workers’ compensation, unemployment compensation, and wage and hour laws. There’s also a split of authority among the courts regarding whether claims under the FMLA can be released.

As part of the release and settlement agreement, consider whether you want a provision stating that the employee will not reapply to work for your company. While you can waive that stipulation if you like, you need to consider whether you would want certain employees to reapply if economic conditions improve and you need to expand your workforce. Without such a clause, the terminated employee could reapply and then sue you for not rehiring him.

You must be careful, however, not to include a provision barring the employee from filing an Equal Employment Opportunity Commission (EEOC) discrimination charge or participating in an EEOC investigation. A court would likely find such a provision unenforceable and void as a violation of public policy. However, an employee can waive the right to recover in his own EEOC lawsuit. To guard against a dispute over the enforceability of the release, consider whether you want to require that any dispute over the release be subject to binding arbitration or whether you prefer to have it decided by a court.

Older Workers Benefit Protection Act (OWBPA)
The Older Workers Benefit Protection Act (OWBPA) requires that the waiver of federal age discrimination claims be knowing and voluntary, and it sets forth very detailed requirements regarding what “knowing and voluntary” is. If the waiver of claims is in connection with an exit incentive or other employee termination program in which two or more employees are essentially being offered the same type of package in return for a release or waiver of age discrimination claims, the individual employee is entitled to 45 days to consider the settlement agreement. Normally, when dealing with just one individual, the consideration period is 21 days.

In addition, if a release is being sought in connection with an exit incentive or other employment termination program, you must inform the individual in writing of the following:

  • the group covered by the program;
  • the eligibility requirements and time limits of eligibility;
  • the job titles and ages of all individuals who are eligible or who were selected for the program; and
  • the ages of all individuals in the same job classification or organizational unit who are not eligible or who were not selected.

These requirements have bedeviled numerous employers because even a small mistake can prove very costly. For example, failing to accurately describe the group that was considered for the program can result in legal liability. Moreover, making false statements to employees regarding the company’s future plans for layoffs can be a basis for setting aside the waiver on the grounds of fraud. If you fail to comply with the technical requirements of the OWBPA, the employee can keep the money you paid her for the release and still sue the company.

The OWBPA contains other detailed provisions as well. One stipulation requires that the release refer specifically to rights or claims falling under the Age Discrimination in Employment Act (ADEA). The provision prevents individuals from waiving rights or claims that arise after the release is signed. It mandates that individuals signing the release receive valid consideration beyond what they would otherwise be entitled to in return for signing the waiver. Additionally, it requires that workers be advised in writing to consult with an attorney before signing the settlement agreement.

Again, these requirements are strictly enforced. For example, a court has held that a release referring to “age discrimination” without specifically mentioning the ADEA was inadequate and resulted in the release being deemed invalid. Similarly, a court decided against an employer that had employees acknowledge that they had been advised to seek legal counsel before executing the agreement. The court held that the acknowledgment was inadequate, stating that the advisement to seek counsel should have been in writing.

Bottom line
Given the difficulties terminated employees may find in obtaining new jobs during a recession, we can’t emphasize enough the importance of exercising extreme care when conducting a RIF. It’s imperative that you comply with applicable discrimination and employment laws and regulations before, during, and after the reduction. If you decide to obtain a settlement agreement and release of claims from your employees in return for additional severance pay or some other benefit, make sure that your release has been reviewed by experienced employment counsel to avoid the many legal traps that await the unwary employer.